Home—Online trading—Spread betting explained—Spread betting blog—A lesson in trading with Elliott waves
Aug 10, 2012, 06:20
Posted byJohn C Burford
Today, I will follow up on my article of 30 July, where I covered the US T-Bond market. It’s just offered a superb lesson in how I use Elliott waves – and what I do when the waves do not develop as I expect.
Back then, the market was making new highs, and I set out my case for suspecting a top in that region.
I made two short trades in the 152-153 area, and I was rewarded with nice waves down.
This is the chart I showed then:
(Click on the chart for a larger version)
Up to that point, the market was tracing out a potential classic Elliott wave pattern in five waves. My third wave was showing ‘length and strength’ – a necessary requirement for me to put a third wave label on such a move.
I was getting really quite excited about the possibilities!
The importance of this forecast is that with a secure five down waves, I could say the trend had almost certainly changed to down and I should begin trading primarily from the short side.
At the time, the market was tracing out a potential fourth wave, and my ideal scenario was for a new low in a fifth wave – with hopefully a positive momentum divergence at the fifth wave low.
Meanwhile, I had my protective stop at break-even, as I mentioned.
And since then, this is what the market has done:
We had the very volatile period last Thursday, where the market made every attempt to put in that new fifth wave low.
But it failed, and the market rallied back to the 152 level, and crucially, the rally carried above my fourth wave top.
And because of this fact, I knew I had to abandon my labels! I had to abandon my dreams of big declines – at least right away.
Trader tip: When the market does not do what it ‘should’, it is best to wipe the slate clean and start afresh looking for new Elliott wave labels.
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But I still had my trade on. Should I just abandon that too, and take a small profit? The odds were increasing that the dip to the wave 3 low was a simple dip in the on-going bull market, paving the way for new highs.
After all, the move down to my wave 3 low has a clear three-wave form, suggesting that interpretation.
Or should I simply stay with the no-risk trade and see what develops?
This is a very common difficulty – and as a trader, it’s something you must address yourself. With practice and experience, it becomes easier – so long as you’re sticking to good money management rules.
In the end, I decided to stay with the trade, mainly because of the first chart in my 30 July email:
Interest rates were clearly ready for a rally off the lower tramline. And from experience, I know that very long-term bear markets do not turn around easily – there are many attempts to get the trend back on track.
The effect of this is to produce deep upward retracements in the T-Bond market.
And this time it paid off for me!
Having stayed with the trade, the market gratifyingly moved lower into new low ground. So having abandoned my five-wave interpretation down, what can I expect in terms of Elliott waves?
Clearly, with this move into new low ground, I began to suspect that instead of a five-wave move, it really will turn out to be a large A-B-C down. That meant I should look to take profits on my short trades at some stage near the C wave low, if it developed.
But where? That’s where the tramlines come in…
Yesterday, I spotted a superb tramline pair on the hourly chart:
The upper tramline connects the two major peaks, while the lower tramline is not so definite, and could be drawn in slightly different places.
No matter – with the clear A-B-C down, and the huge positive momentum divergence at the C wave low, this was the place to abandon ship – and take a very tasty over-400 pip profit on the trades.
Yes, I had to work hard for this and was well rewarded. But of course, not all trades work out as well as this. Over the long haul – and I consider trading as a long-term business – if I can see 50% of my trades as profitable, I’m on track to make significant profits over time.
Have a great weekend – and I shall get back to the exciting moves in the Dow, gold and euro next week.
I don’t know about you, but I get the feeling these markets are shaping up to provide some more terrific summer action. Let’s be ready for it!
I hope you found today’s issue on Elliott waves useful. If you have any thoughts or observations to share with the group, please leave them below.
• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
The essentials of tramline trading
Advanced tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Trading with Fibonacci levels
Trading with 'momentum'
Putting it all together
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Published in Spread betting blog
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(10 August 2012, 08:07PM)
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hi john -really informative as usual-i look forward to your regular updates as i'm sure many do-w.r.t above e.w. why could you not label new 152 high as wave4?is it because it's higher than wave1 low?cheers john
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The trades on this blog are all 'closed', past trades. These aren't trades for you to copy, they are there to teach you some useful trading tactics for your own spread betting. And always remember: spread betting carries a high risk to your capital as you can lose more than your original stake.
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